The Hypocrisy of the Stimulus Addicts

By Mark Gongloff

Doug Kass has a question for anybody who feels bullish about stocks because they think central banks are going to be pumping easy money into the global economy for eternity: How is that a good thing?

Mr. Kass, of Seabreeze Partners Management, who for the record has been swinging from short-term bullish to bearish as the market swings (to his credit, getting bullish at bottoms and bearish at tops), writes this morning:

While the consensus has moved down to looking for a relatively weak worldwide economic recovery, when does a weak worldwide economic recovery dependent on generous policy (with the promise of economic reacceleration) become a bad thing as it underscores (among other things) the long tail of deleveraging and the structural issues that will likely continue to weigh on growth?

After all, in the past, many optimists have observed that rising interest rates would be healthy for risk assets, as it would be a reflection of improving growth prospects, yet rates have not risen.

Nevertheless most market bulls now cite low interest rates as a valuation positive and contributing to the appeal of risk assets.

There seems to be some hypocrisy in this view.

You hear that, stimulus addicts? You’re hypocrites.

That sure sounds about right to me. There’s no doubt a stock market rising on stronger economic data makes more sense and is healthier than a stock market rising simply because of the promise of yet another dose of stimulus that may not help the economy at all.

But then Mr. Kass loses me when he suggests the only prescription for this fever is higher interest rates:

Some rise in interest rates, owing to better economic growth, is what is now needed to extend the market rally. In its absence, I recognize that the option of easing by the Fed and the ECB can serve to stabilize equity markets from the effect of slow growth, but there comes a point in time when the failure of monetary policy to produce a reacceleration of economic growth will become more worrisome to investors. This is particularly true without any sense that pro-growth fiscal policies will be adopted by the November 2012 elections.

From my perch, that point in time is soon approaching when investors will begin to more seriously struggle with the realization that more monetary easing (and cowbell) will fail to produce more meaningful economic growth prospects around the world.

Perhaps the first shot across the bow and recognition of this risk was already seen in the weakness in equities during the first half of August.

No doubt easy money brings its own headaches, and there’s certainly a solid case to be made for not adding more in the form of QE3, Operation Twist or what have you.

But raising interest rates right now, tightening policy, isn’t the right move. We’ve seen first-hand what happens when you do that, in Europe. Financial conditions are tightening there, the economy is slowing down, the financial crisis has not been solved and there’s certainly not much confidence in policy makers.

Update: Mr. Kass writes to stress that he’s not saying central banks should raise rates right now. He’s saying the rise in rates should come as a result of stronger economic growth. Sorry I missed that nuance at first read. Can’t argue with it.

Of course, there are a handful out there who do think the Fed raising rates would be a good idea, and to them the same argument applies: Not yet, and not without stronger growth to justify it.

Comments (5 of 7)

Is Bernanke and the FRB stronger than inflation's affect on the bond market? If he isn't, and we all can use our own rationale whether rational or not, what difference does his opinion, hope or policy make? The program driven markets (remember how that ended in 1987) is not based upon fundamentals but headlines which is merely a zero-sum game. Are the markets discounting anything or just spinning its wheels in a volatile atmosphere?

9:59 am September 1, 2011

Camden wrote :

It's not a question of whether or not it's good for central banks to be pumping easy money into the global economy for eternity, the question is whether or not it's a good thing for central banks to keep interest rates low until economic activity increases. I suggest it is. Inflation will stay modest as long as there is slack in demand and slack in capacity of the economy to produce. this allows for low interest rates to help businesses expand once the de-leveraging in the economy subsides and the normal business cycle takes hold.

9:32 am September 1, 2011

chistletoe wrote :

Americans and other westerners have had "easy money" for so long
that they no longer even know how to work, how to serve,
how to create real value that other people are willing to trade for.

So they HAVE to get even more easy money just to survive.

At this point, though, I agree with you,
I do not see how their survival is a good thing ....

9:25 am September 1, 2011

BMF wrote :

I don't know that Kass is recommending a policy change to raise rates. I think that he is simply suggesting the obvious - higher rates due to an increased demand for loans would be a plus for the economy, and ultimately stocks.

Thanks for reading MarketBeat. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.

About MarketBeat

MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.